Government is worried for only auto and reality sector and I think government wants to improve GDP growth rate only through providing maximum stimulus to real estate and auto sector. But the important question is who are purchasing houses, flats or commercial shops? How many of Indians are able to buy costly consumer items, costly bike and costly cars?
Whether declining interest rates are really conducive for real and consistent GDP growth?
And the most vital point to be pondered over is whether majority of population will be able to lead their family life comfortably whose survival depend mainly on interest income?
Certainly rich and upper middle class people whose number one annual income is at least more than four lacs can afford purchase a house worth Rs.30lacs in Number One (in fact cost of house is normally Rs.50 lacs including number two money when the amount declared for sale in government deed is Rs.30.00 lacs).Only such people can afford buy a car and maintain its expenses. Because such income group can only bear the expenses of his family and save enough to buy a house or a bike or a car and can afford the subsequent expenses. Even a person with annual income of less than four lacs cannot avail loan from a bank for purchasing a house worth Rs.20 to 30 lacs.
Of course person with number two income can afford buying a house or a car even if his annual pay is only one lac or even lesser. Even if poor people dare avail a loan for car or a house, he cannot afford repayment of the same as per bank’s norms due to his poor repaying capacity.
Therefore lower interest rate regime will benefit only upper middle class and rich people of the country who are either in service or in business or trading in house or bike or car. Both consumer and manufacturers in these sectors will be happy if the interest rates go down further.
To bring lending rates down as per directive of Finance Minister or RBI, it is to be noted that interest payable on deposits by banks has already come down from 11% to 5.5% in many banks during last one year .Actual beneficiary of reduction of interest rate directly or indirectly is available to only and hardly 20% of total population of the country.
More than 80% of the population whose livelihood depends on interest income (pensioners, farmers, retired persons etc) or whose annual income is less than one lac a year are now crying and facing enormous difficulties in meeting their even family expenses. Such poor, downtrodden and middle class persons cannot dream of buying a house or a bike or a car. At best they can get some unskilled job of labour in the house of rich persons who take hard work but who hesitate to pay sufficient money in wages. They are facing considerable erosion in their interest income, almost halved and at the same time their expenses on the same basket of commodity which they normally consume for survival have doubled due to abnormal price rise. Their poverty has been increasing day by day and riches have been growing richer and richer.
The more profit margins corporate houses realize on their products including house or a bike or a car, the more successful businessmen they are told and even government as well as stock market admire such trade houses. As a consequence gap between the riches and the poor is widening day by day. Situation is becoming alarming and inviting violent movement against the exploiters.
Days are not far when government will have to take into consideration the misery of those who survive on interest income and RBI will have to put stop on falling interest rates. Government will have to put brake on increasing profit margins of traders, manufacturers and other service providers to check rising prices of all essential commodities. Profit making agenda of the governments and the consumerism of top 5% of population cannot afford to ignore welfare of society at large constituting residual 95% of the population. Person who are advocating further fall in interest rates, who are indulged in profit making and creating artificial price rises in all essential commodities by hoarding are inviting nothing but social upheavals, social unrest and disturbance in law and order and ultimately violence all where.
Further there are some economists and heads of businessmen organizations like FICCI who are advocating further fall in interest rate on lending by banks. Indirectly they are advocating further fall in interest offered by banks on deposits they accept from customers. They plead that investment in new projects will become economically viable if banks extend credit to them at lower rate of interest which were not economically viable under high interest rate regime. But the remarkable point here is when interest on deposits is very much low, people will not tend to save their earnings but tend to spend more and more. When savings of people comes down sharply, resources available with bank will surely shrink and they will not be able to provide credit to needy businessmen. As of now government has provided abnormal stimulus package and extraordinary liquidity to banks. One can imagine the horrendous position of the banks when government withdraws the said liquidity package and people also get disincentive for savings due to lower interest.
I would like to add here that 80% of investment in business comes from public savings in India and survival of Indian business and trade do not depend on external commercial borrowings or foreign direct investment or any aid from International financial body.Existance and prosperity of Indian GDP largely depend on Indian savings and not on foreign borrowings. As such when interest rate falls to an undesirable low extent, this will lead to clear cut disincentive for those who tend to save out of what they earn. When growth rate in savings fall it will adversely affect the investment capacity of the government and also welfare schemes of the government. All plans on development formulated by Government of India in their budget or in five year plan will fall flat if people save less and start spending more and more in the same way as Americans spend in USA. Obviously sharp and drastic fall in interest rate on deposits will strike the root of economy gradually and in turn invite the same problem which USA is facing and which has caused global slowdown and economic recession.
Some bankers and economists plead that due to high lending rates borrowers are not able to survive and their projects fail. It is also said advances made by banks become irrecoverable due to increasing burden of interest on the borrower and ultimately bank’s assets become bad and Non- performing. I would like to mention here that 70% of lending made by banks is sub PLR i.e. at much lower rate. Even RBI is worried of the fact that banks are extending credit at very much low rate and their decisions are not transparent and healthy and perhaps this is why RBI have suggested for adopting Base Rate instead of PLR or BPLR.
In other words one can say that major chunk of credit made by banks to industrialists, exporters, home seekers, students seeking education loan , buyers of vehicles and houses and farmers is at rate below than Prime lending Rate (PLR) or bench Mark Prime lending rate (BPLR). It is also bitter truth that 90% of non performing assets belong to those borrowers who were financed at sub PLR rates.
As such plea of financial experts that high interest rate is not conducive for GDP growth is totally untrue. Rather abnormal fall in interest rate on deposits may convert millions of pensioners, retired old persons and small traders whose major source of income is from interest as unemployed
Moreover huge erosion in interest income of a large section of Indian population due to falling interest rate may pull down demand in the market to such a great extent that even survival of manufacturing sector is jeopardized.
Keeping in view all above facts of the Indian mass and true character of Indian population in general, I think it is the dire the need of the hour to ponder over the structure of interest rate applicable on deposits and lending and also whether freedom to bankers to decide their interest rates is suitable and beneficial for overall growth of the Indians and health of the Indian economy. National level debate among economic experts is now necessary to decide whether further cut in interest rate of deposits is desirable.
Danendra jain
Wednesday, November 04, 2009
Friday, September 25, 2009
Interest rebate on Home Loans
Before 1991 banks used to charge higher rate of interest for higher amount of loans. The logic behind such approach was that rich businessmen could afford higher rate of interest. Small businessmen can compete in the market with wholesale dealers and bulk manufacturers only when they are given certain discounts on interest rates. This philosophy worked upto 1991 when social objective was real and truly followed by bankers and this was the sole target of the government too. Banks were nationalized in the year 1969 so that poorest among the poor can also approach banks for keeping their surplus fund and also to seek loan for their business and personal requirements. Banks were opened in villages so that it is made available in even remotest villages and its reach become wider and wider up to even downtrodden villagers and even scavengers in the towns. All types of facilities and rebates were meant for poor and middle class.
In the modern days i.e. after 1991or you can says in the age of economic reformation, liberalization and globalization, the approach of the government and also the bankers have completely changed. After 1991 social objective has in fact become a mask to conceal their hidden agenda of earning more and more profits. Now big businessmen can be given loans in hundreds and thousands of crores rupees at sub PLR rates whereas a small trader cannot expect loan below sub PLR rates. Exporters can be given bulk loan at subsidized rates. There is neck to neck competition among bankers to reduce their lending rates for home loan and car loan seekers. The more loans they ask for, the more discount they will get. All types of infrastructure benefits are now extended to business giants, and not small or middle sized businessmen.
It is ironical that banks even now boast for fulfilling social objective. Yes, they achieve the required ratio of lending in priority sector, but not by making fresh disbursement to small and middle borrowers but by including bigger and bigger loans in the domain of priority sector or by enlarging the activities in the domain of small borrowers. In this modern era even credit facilities upto Rs. 5.00 crores is considered as loan under priority sector.
Home loan up to Rs.50.00 lacs are considered as priority lending at lesser and lesser rates of interest. Here it is worthwhile to mention that loan of Rs.30 lacs can be taken only when house is of the value of at least Rs.40.00 (truly speaking such house may of Rs.50.00 to Rs.60 lacs keeping in mind the black money paid for each home sale). Car loan is given by banks at low rates and various discounts are being allowed to car buyers during festival season. But the million dollar question is who can afford buying a car? Can a common man (95% of population) afford a car?
Now can any one imagine that poor or middle class person having less than three lacs rupees as annual income can afford home loan of more than Rs.12 lacs because maximum permissible finance for home loan is four time of annual income in most of the banks.?
Can a person of income less than rupees three or four lacs can dream of buying a house of Rss.30.00 lacs (including black money) and can he afford repayment of loan of Rs.20.00 lacs by legal source of income?
Obviously banks are reducing lending rates for rich persons, they may be home loan seekers or buyer of costly car or they may be big trade houses, big exporters or large corporate houses.
It is not only banks which are crazy for big fishes. Even government is cutting tax or making such policies that cost on freezes, computers, laptops, mobiles, cars, scooter, wine, air travels is gradually coming down. On the contrary prices of essential commodities which are lifeline for poor and middle class people are sky rocketing day by day. Prices of potato,onion, tomato, green vegetables, pulses, wheat, rice, sugar, milk .and many more such things on which lie the survival of 95% of Indian population are rising up and up, not because of less production but because of faulty policy of the government. Hoarding, black marketing and profit making has become the accepted habit of rich traders and manufacturers.
Businessmen who have the capacity to store the goods of essential use can earn any profit by hoarding the same because government has given them unlimited freedom. Even education has become so costly that common men cannot imagine of quality higher education or even primary education in towns. Common men cannot imagine of cheap health care in government run hospitals and they have to pay unreasonable big amount for treatment in private nursing homes.
Who will take stern action?
Who will stop future trading in commodities?
Who will prevent hoarding and profit making in food items?
Who will prevent bankers extending credit facilities to rich and affluent class at sub PLR?
Obviously none. Because even Manmohan Singh, the Prime Minister of India tells that there is corruption rampant all where in the country, even he accepts that development fund given by government to different agencies do not reach in the hand of poor. Even PM tells that there is a need to check price rise immediately .But he is helpless and unable to prevent price rise. He cannot keep prices in control because he has given unlimited freedom to traders in the name of reformation. He also imagines just like a help less poor, like a common man and like average Indian imagines and curse the system.
After all who will cure the system when everyone cry and cry only against the cancerous disease of mal administration, corrupt and inefficient government machinery?
Who cares for poor?
Of course Bankers do not care at all and neither can they afford doing so.
If anyone is interested to know the reality I would like RBI to submit data on following two points so that educated class and so called economists and social reformers can understand the reality of social agenda of the bank.
Loans outstanding up to Rs. 5.00 lacs( including home loan , education loan, trade loan or agricultural loan ) as on 31.12.2005. 2006, 2007, 2008, 2009 and as on date and disbursed during these years .These data will tell the real story of social objective and tell whether poor and middle class men are really getting loans from banks.
Secondly to know the amount of bulk financing made by banks at Sub PLR ,year wise disbursement made by banks to rich people in the range of Rs.10 crores and above can also be obtained to compare the same with that made to common men up to Rs.5.00 lacs.
Danendra Jain
Agartala
26th September 2009
In the modern days i.e. after 1991or you can says in the age of economic reformation, liberalization and globalization, the approach of the government and also the bankers have completely changed. After 1991 social objective has in fact become a mask to conceal their hidden agenda of earning more and more profits. Now big businessmen can be given loans in hundreds and thousands of crores rupees at sub PLR rates whereas a small trader cannot expect loan below sub PLR rates. Exporters can be given bulk loan at subsidized rates. There is neck to neck competition among bankers to reduce their lending rates for home loan and car loan seekers. The more loans they ask for, the more discount they will get. All types of infrastructure benefits are now extended to business giants, and not small or middle sized businessmen.
It is ironical that banks even now boast for fulfilling social objective. Yes, they achieve the required ratio of lending in priority sector, but not by making fresh disbursement to small and middle borrowers but by including bigger and bigger loans in the domain of priority sector or by enlarging the activities in the domain of small borrowers. In this modern era even credit facilities upto Rs. 5.00 crores is considered as loan under priority sector.
Home loan up to Rs.50.00 lacs are considered as priority lending at lesser and lesser rates of interest. Here it is worthwhile to mention that loan of Rs.30 lacs can be taken only when house is of the value of at least Rs.40.00 (truly speaking such house may of Rs.50.00 to Rs.60 lacs keeping in mind the black money paid for each home sale). Car loan is given by banks at low rates and various discounts are being allowed to car buyers during festival season. But the million dollar question is who can afford buying a car? Can a common man (95% of population) afford a car?
Now can any one imagine that poor or middle class person having less than three lacs rupees as annual income can afford home loan of more than Rs.12 lacs because maximum permissible finance for home loan is four time of annual income in most of the banks.?
Can a person of income less than rupees three or four lacs can dream of buying a house of Rss.30.00 lacs (including black money) and can he afford repayment of loan of Rs.20.00 lacs by legal source of income?
Obviously banks are reducing lending rates for rich persons, they may be home loan seekers or buyer of costly car or they may be big trade houses, big exporters or large corporate houses.
It is not only banks which are crazy for big fishes. Even government is cutting tax or making such policies that cost on freezes, computers, laptops, mobiles, cars, scooter, wine, air travels is gradually coming down. On the contrary prices of essential commodities which are lifeline for poor and middle class people are sky rocketing day by day. Prices of potato,onion, tomato, green vegetables, pulses, wheat, rice, sugar, milk .and many more such things on which lie the survival of 95% of Indian population are rising up and up, not because of less production but because of faulty policy of the government. Hoarding, black marketing and profit making has become the accepted habit of rich traders and manufacturers.
Businessmen who have the capacity to store the goods of essential use can earn any profit by hoarding the same because government has given them unlimited freedom. Even education has become so costly that common men cannot imagine of quality higher education or even primary education in towns. Common men cannot imagine of cheap health care in government run hospitals and they have to pay unreasonable big amount for treatment in private nursing homes.
Who will take stern action?
Who will stop future trading in commodities?
Who will prevent hoarding and profit making in food items?
Who will prevent bankers extending credit facilities to rich and affluent class at sub PLR?
Obviously none. Because even Manmohan Singh, the Prime Minister of India tells that there is corruption rampant all where in the country, even he accepts that development fund given by government to different agencies do not reach in the hand of poor. Even PM tells that there is a need to check price rise immediately .But he is helpless and unable to prevent price rise. He cannot keep prices in control because he has given unlimited freedom to traders in the name of reformation. He also imagines just like a help less poor, like a common man and like average Indian imagines and curse the system.
After all who will cure the system when everyone cry and cry only against the cancerous disease of mal administration, corrupt and inefficient government machinery?
Who cares for poor?
Of course Bankers do not care at all and neither can they afford doing so.
If anyone is interested to know the reality I would like RBI to submit data on following two points so that educated class and so called economists and social reformers can understand the reality of social agenda of the bank.
Loans outstanding up to Rs. 5.00 lacs( including home loan , education loan, trade loan or agricultural loan ) as on 31.12.2005. 2006, 2007, 2008, 2009 and as on date and disbursed during these years .These data will tell the real story of social objective and tell whether poor and middle class men are really getting loans from banks.
Secondly to know the amount of bulk financing made by banks at Sub PLR ,year wise disbursement made by banks to rich people in the range of Rs.10 crores and above can also be obtained to compare the same with that made to common men up to Rs.5.00 lacs.
Danendra Jain
Agartala
26th September 2009
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